The fund has returned 32.2 per cent over one year compared to 25.8 per cent in the index, according to FE data, and 28.9 per cent over three years compared to 20.7 per cent in the index.

Pakistan will be added to the MSCI Emerging Markets index from 1 June, graduating from the Templeton fund’s benchmark, the MSCI Frontier Markets index.

Mobius argues the country shouldn’t yet be graduated, disagreeing with the index providers focus on free float for for their classifications.

“If the market capitalisation rises and if the trading turnover increases and the number of shares increases through IPOs and other measures then the free float increases and they want to graduate. That doesn’t really mean the companies increase their governance or improve their behaviour.”

Hardenberg says the addition of Qatar and the UAE to the emerging markets indices in 2014 sent those markets “through the roof”, but that this was followed by a prolonged and dramatic correction.

MSCI announced in mid 2013 that it would be upgrading the two countries from frontier and emerging markets in May the following year, prompting inflows that caused each market to jump in price.

MSCI Qatar rose 30 per cent in 2013, while UAE rose three times that amount. Over the last three years the indices have delivered annualised performance of -7.1 per cent and -8.2 per cent respectively.

“Some of these markets, which are a lot less mature will be exposed to not only the buying, but also the selling of these ETFs and passive funds. I wonder if they are mature enough, and big enough and liquid enough to absorb that,” Hardenberg says.

In-house indices

Concerns about the criteria used by index providers has prompted Franklin Templeton to create its own index for its Frontier Markets fund. It caps each country at 10 per cent, whereas the MSCI Frontier Markets 100 includes 22.6 per cent in Argentina and 19.8 per cent in Kuwait.

He says there are notable differences between travelling to emerging markets and travelling to frontier markets, with the former having better infrastructure and functioning water systems, as well as notably higher household wealth and per capita spending.

“To me, Pakistan is not one of those countries. When you travel to Pakistan you will realise infrastructure is still behind, per capita income is still very low, the general economic conditions are still very nascent. Just because these index guys say it is now an emerging market, we have our definitions.”

The Philippines and Egypt are other countries he believes should be classified as frontier markets.

Chaebol hinder South Korea

Family-controlled companies called chaebol are holding back South Korea’s graduation from emerging market to developed market classification, says Mobius.

“How much is controlled by the families and their associates and by the institutions that vote in their favour,” he says.

“They have to get over that and I think they will get over that and then could be graduated into the developed markets because on a per capita basis they’re getting very close.”